Another round of rate cuts, another set of new highs, and one more job report indicating the economy is weathering the storm of trade tensions and cooling global growth.
Employers added 128,000 jobs for the month of October, while wage growth remained anemic, and the number one concern for most employers is finding and retaining talent. In addition to a better than expected number for October, August and September numbers were revised upward by 95,000. This makes it the 109 straight month of job gains, more than double the previous record. It now seems that the fears of an imminent recession, which mounted over the summer, were overblown. It is the consumer that continues to carry the economy and the services sector such as hotels and restaurants that showed the most job growth. The divergence between confident consumer and wary businesses cannot continue forever. Eventually, either businesses with start to cut jobs, which will erode consumers’ confidence, or the willingness of the consumer to spend will encourage businesses to ramp up production again.
With a new record high for the S&P 500 this month the index was up another 2.04%, for a year to date return of 21.17%. Although the Dow Jones Industrial Average was also up for the month, the .48% move was not enough to set new highs. The Dow, made up of just 30 companies, has lagged the broader S&P 500 index this year by nearly 6 percentage points. The disparity can be attributed largely to the lack of performance of just one name in the Dow this year, Boeing. The tech heavy Nasdaq was the leader adding an additional 3.66% for the month, with a year to date gain of 24.97%. With the combination of trade fears, an economic slowdown, and geopolitical risks around the world it is hard to believe the market has looked past it all. Investors have been buying gold, possibly due to some of the political risks sending gold higher this year by over 18%. Let’s not forget the flood of money going into the bond market driving yield lower across the board. Long term yields edged slightly higher this month but have fallen 37% from where we started the year. With the intervention of the Fed short term rates have declined sending 2-year treasury yields down over 6% on the month and down almost 39% for the year. The continued strength of both bonds and stocks continues to exhibit investors both willing to take on risk with hopes of the economic recovery extending further, and investors looking for the protection of the bond market on fears that the economy is slowing. Like the divergence in consumer and business confidence, this divergence cannot continue forever.
To add to the number of things this month that paint different stories, a headline I found interesting, considering the changing environment in retail, was the opening the $5 billion American Dream mall. The 3 million plus square foot space located near MetLife stadium in East Rutherford New Jersey opened its first phase during October. The developers behind the project, are also behind the Mall of America-the largest mall in the U.S.-and West Edmonton Mall in Canada-the largest mall in North America. This American Dream Mall will include an ice-skating rink, a Nickelodeon theme park and in November a Nickelodeon water park. This comes while according to estimates by the commercial real estate firm CoStar Group, retailers closed a record 102 million square feet of store space in 2017, then smashed that record in 2018 by closing another 155 million square feet. Retailers have announced more than 8,600 store closures so far this year including brands such as Chico’s, Dress Barn, Family Dollar, Sears, Bed Bath and Beyond, Victoria’s Secret, and Gap. Even high-end retailer Neiman Marcus is struggling to keep their head above water with over $5 billion in debt. Will the new concept of 55% entertainment and 45% retail bring traffic back to the traditional mall or is this too destined to fail?
With politics taking center stage, it was interesting that health care was the top performing sector in October. This comes partially on the heals of good earnings from some of our largest pharmaceutical companies, and portfolio holdings, Merck and Pfizer. With healthcare and medical costs at the center of debate, it is a topic we are going to hear more about over the coming months. In an article early in October by CNBC it noted that the average American household spent almost $5,000 per person on health care last year. That represents a 101% increase from 1984 according to an analysis of the Bureau of Labor Statistics Consumer Expenditure Survey. Surprisingly the main driver of the increase was not drug costs or medical devices but insurance costs. The average American paid about $3,400 for insurance alone in 2018. With the average cost for an employer-based insurance plan for a family now running about $20,576, and families still on the hook for an average of $6,015 it is no surprise that it needs to be a topic of discussion. The increase in insurance costs have outpaced wages over the last decade putting the burden of protection on workers and their families. Even for those on Medicare, the bite it takes out of a retirees fixed income is taking a toll on our elderly population. Consider this, the average Social Security check in January of 2019 was $1,461, while the cost of the standard Medicare part B was 135.5 nearly 10% of Social Security income. This does not include the cost of a prescription plan or out of pocket costs each year. It is estimated that a healthy 65-year-old couple retiring in 2019 will spend $387,644 to pay for health care costs for the remainder of their lives, according to Health View Services, a provider of health care cost projection software. It is statistics like this that give rise to a proposal for all encompassing “Medicare for All” plans put forth by Democratic presidential candidates Bernie Sanders and Elizabeth Warren get so much attention. Although there is no solution as to how we would pay for such a plan, expect the discussion about the cost of health care to dominate our political headlines in the coming months.
Another discussion making its way into the headlines this month was highlighted by Barron’s. The article titled , “The Economic Case for Paternity Leave” touches on so many highly sensitive issues in our society and workforce today that it is worth noting. It may be surprising to many that as of January 2019 there are only 27 companies, or 4.5%, of the S&P 500 that have female CEO’s. “Women are penalized for having children. Mothers are paid less and are less likely to reach positions of senior leadership. This is unfair and wasteful.” This is the opening paragraph to the article regarding an argument supporting paternity leave. Although here in New York we take for granted things like the Paid Family Leave Act providing new parents up to 10 weeks of paid leave with the birth of a new child, according to the Bureau of Labor Statistics, less than a fifth of American full-time workers have access to any paid family leave. As shocking as it may seem according to the article, in most rich countries the gender wage gap is entirely a function of motherhood, with childless women earning the same as their male peers. This is obviously a disadvantage to women but according to a study of 21,980 companies in 91 countries by economists Marcus Noland, Tyler Moran, and Barbara Kotshwar it is also bad for men. According to their study “the presence of female executives is associated with unusually strong firm performance,” while the absence of women leads to lower returns. Economists at the International Monetary Fund concur and said “gender complementarity increases productivity” for everyone, boosting both male and female wages. They estimate that boosting the share of women in the paid workforces of rich countries would lift gross domestic product by 10%-20%. Expect more headlines and debate about the gender wage gap!
As we roll into the final two months of the year and there is optimism of at least phase one of a trade deal, earnings have been modestly above expectations, the impeachment hearings continue, and markets move to new highs, we can try to remain optimistic that 2019 will be a much better year than anticipated when we rang in the new year.